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Cathie Wood bought the Grayscale Bitcoin Trust. Should you? | The Motley Fool

The Grayscale Bitcoin Trust (GBTC -1.77%) has become a regular in the headlines in recent weeks. The Trust recently reached a new record discount to the price of Bitcoin (BTC -0.73%) following the contagion resulting from one of the largest crypto exchanges, FTX, declaring bankruptcy.

With GBTC trading at a discount, investors might see this as an opportunity. famous investor Cathy Wood did. His company, Ark Invest, recently purchased an additional $1.4 million to bring its total stock count to 6.357 million shares. But before deciding whether to follow Wood’s investment strategy, it can be helpful to understand how Trust works and how it differs from owning Bitcoin itself.

The Grayscale Bitcoin Trust was established in 2013 and is designed for investors who want exposure to Bitcoin without having to own the asset. Investors buy Trust shares on the stock exchange and Grayscale owns the real Bitcoin. It’s important to know that the Grayscale Bitcoin Trust owns the Bitcoin, but to really understand why the Trust is trading at a discount, you need to understand the dichotomy between a trust and a exchange traded fund (AND F).

The Grayscale Bitcoin Trust is currently valued at around $10.3 billion and owns 643,572 Bitcoins. Since it is a trust (and not an ETF), Grayscale cannot actively manage the value of its Bitcoin relative to the number of shares bought or sold by investors. When investors buy or sell their shares of the Trust, Grayscale does not immediately turn around to buy or sell Bitcoin. Essentially, Grayscale expects the free market to value the Trust’s shares relatively close to the value of the Bitcoin it owns. However, this recently failed.

Year-to-date, the Grayscale Bitcoin Trust has been trading at a discount as more investors redeemed their shares, and Grayscale still holds roughly the same amount of Bitcoin. However, for most of its history, GBTC traded at a premium, meaning the value per share was worth more than the value of Bitcoin held by Grayscale due to investors’ increased desire for exposure to Bitcoin. If the Trust were an ETF, the price would follow the value of Bitcoin more closely, closing these gaps and bringing balance between the price of stocks and the value of Bitcoin on a more consistent basis.

Should you follow Wood’s example?

Currently, the market price per Trust share is just below $9. If there was true equilibrium, the price per share should be around $15.

You may think this offers a lucrative opportunity. If this gap is closed, investors could see a profit per share of almost 40% in addition to the possibility that the value of Bitcoin could also increase in the future.

That’s likely part of the reason Wood has been buying more shares of the Trust recently. She and her team might see the discount as just another reason to buy and potentially boost their profits, but no one really knows.

Their reasoning could also relate to the possibility of the Trust converting to an ETF in the future. So far, Grayscale’s efforts to convert to an ETF have been crushed by the Security and Commission Exchange (SEC). Optimists believe it’s likely only a matter of time before Grayscale gets that approval as investor demand for Bitcoin exposure grows. If the SEC gives Grayscale the green light to become an ETF, that price gap should then close.

If you are looking for exposure to bitcoin, the best way to do that would be to buy bitcoin itself. By doing so, you have full control over your Bitcoin and can do whatever you want with it. However, if you are looking to assume some slight additional risk for the possibility of an additional 40% upside, GBTC might be worth considering.

RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool has a disclosure policy.

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